5 Questions about the Roth IRA

By Stew

The topic of saving for retirement and all of the attendant tax issues can be a complicated discussion. For me, the issue is one of those that just does not stick in my head. I can read all about Roth IRAs and Traditional IRAs and 401Ks and then forget everything I learned five minutes later. Today, I want to just talk about the Roth IRA and give five of the most important aspects of this particular retirement savings vehicle. A Roth IRA is when the retirement contribution is considered to be after tax, in other words, the money that you pay in has already been taxed. The advantage of a Roth IRA is that future distributions will be tax-free – at least most of the time.

The great thing about a Roth IRA is that most investments can be included in a Roth portfolio – real estate, stocks, bonds, CD’s and more. Here are five key questions that workers ask about Roth IRA’s:

How old do I have to be to contribute to a Roth IRA?

There are no age restrictions for opening a Roth IRA account, you only have to be able to show earned income during the year. In fact, opening a Roth IRA is one of the things that I wish I had done in high school and college. I had the means to contribute $500 to $1,000 a year to a Roth IRA, but not the knowledge about how to do so. There is an age restriction when it comes to withdrawals. You must be at least 59 and 1/2 to withdraw from a Roth IRA without incurring severe penalties.

What is the difference between a Roth IRA and a Roth 401(k)?

The former is an individual account with taxed contributions and tax-free withdrawals. In a Roth 401(k), the employee contributions are governed by the same rules as the Roth IRA, however, the employer 401(k) matching funds are kept in a separate account and governed by the same rules as a Traditional IRA: tax deductible contributions and taxed withdrawals (generally speaking) and mandatory minimum withdrawals after age 70 and 1/2.

Can I change my Traditional IRA to a Roth IRA?

Yes. But you will have an increased tax bill in the year in which the roll-over takes place. You never paid taxes on the Traditional IRA contributions, so now that the funds are considered a Roth IRA, you will have to “catch up” on your taxes.

Can anyone contribute to a Roth IRA?

No. While contributors are not limited by age, they are limited by Adjusted Gross Income. For single and head of household filers, Roth contributions start to be reduced when AGI reaches $105,000. No Roth IRA contributions whatsoever are allowed at an AGI of $120,000 as of 2010. If you file a joint return, the Roth IRA phaseout starts around $157,000 and no contributions are allowed at an AGI of $167,000.

How much can I contribute to a Roth IRA?

If you qualify (and I for one, am no where near the limiting AGI), you can contribute up to $5,000 annually or $10,000 for married couples. For people age 50 or older, the maximum contributions are $6,000 and $12,000 according to marital status. You can also maximize your Roth IRA contributions in addition to your regular 401(k) work contributions.

Hope that made things a bit more clear for you. Remember that I am not a trained professional when it comes to tax advising or investment advice. The information above is the result of my own research.

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One other thing related to your answer to the last question (and also reflecting your answer to the first question) – you can only contribute up to your earned income for the year (to a maximum of $5K). For example, if you’re in college your only work is a part-time summer job during which you make $2000, then $2000 is your maximum Roth IRA contribution.

The exception to this is a non-working spouse, who can contribute up to the full amount provided that the working spouse has earned enough income to cover both of their contribution limits.

Sheri Says:
May 24th, 2010 at 3:22 pm

“You must be at least 59 and 1/2 to withdraw from a Roth IRA without incurring severe penalties.”

I was under the impression that you could withdraw your contributions at any time with no penalty. I’ve read this many places. Is this incorrect?

Stacey Says:
May 24th, 2010 at 5:56 pm

Contributions, yes. And you can use the 72t rule to withdraw from a Roth OR traditional IRA before 59.5.